How 1031 Exchange Works

A 1031 exchange is the process of deferring capital gains and depreciation tax by exchanging one piece of property for another like-kind property within the 6 rules written by the IRS. One of these rules tells us that the cash proceeds from the sale of the relinquished property is to be held by a third party, Qualified Intermediary from the date of the closing on the old, until the date of closing on the new.

The IRS sees a sale as a taxable event. However, if no cash proceeds are given back to the seller, there is no amount to be taxed on by the IRS. In terms of a 1031 property exchange, this tax is deferred when properly transferred and held by the QI. By transferring the cash proceeds to the QI, the exchanger does not receive any proceeds and therefore is able to defer the tax and roll all of the gain into the purchase of a new investment property.

It's important to note here that while going through a QI in a 1031 exchange is a must, it could be a risk to an exchanger if not chosen property. Why is this? The IRS tells us who the QI cannot be - they can't be your lawyer or accountant. They also tell us that the QI must be an independent third party, but they do not specify any other qualifications. This makes QI's unregulated, which means you as an exchanger need to choose with caution! Here at 1031 exchange connection, we are a team of licensed real estate professionals and CPA's experienced in real estate and well versed in tax law. We are licensed and bonded for your protection, and we proudly display a copy of our bond on our website. When holding the cash, each exchanger's proceeds are kept in a separate, non-comingled account at a highly secure and local bank. With 12+ years of experience in 1031's, we've handled many exchanges and have worked hard to earn our client's trust. To read more about what makes us an experienced and trusted Qualified Intermediary, please go to